“Economic progress, in capitalist society, means turmoil” wrote Joseph Schumpeter. Society can’t move forward if we don’t make space for new ideas. If we want creation then we must accept the destruction that comes with it. You can’t have capitalism without failure.
In fact, business failure rates are highest in the places where it’s easiest to start a business and raise finance.
Yet we shouldn’t fetishise failure. Paypal founder Peter Thiel was right to say that “Failure is massively overrated”. It’s true that we learn from our mistakes, but often we learn the wrong lessons. Beyond the obvious personal tragedy, it can lead entrepreneurs to scale back their ambitions and others to write them off.
It goes without saying that we shouldn’t try to save every failing business. Protectionism traps labour and capital in unproductive firms, limiting the ability of new entrepreneurs to create wealth and raise living standards.
At the same time, not every business failure is due to a fundamentally unsound business model.
We should distinguish between necessary and unnecessary business failure. Often, passionate business owners have identified a gap in the market but lack the business know-how to capitalise on it. If they were better prepared then they might have stayed afloat and even scaled up.
The key might be management. While economists have typically hypothesised a link between management and productivity there have been few attempts historically to quantify the impact. But that’s changed over the past decade or so.
A novel study found that managerial innovations such as Taylor’s Scientific Management, Motorola’s Six Sigma (popularised by GE’s Jack Welch), and Agile Software Development increased productivity and aggregate output by almost as much as technological innovations.
In another study economists surveyed over 35,000 US manufacturing plants about the management practices they use; the results were impressive. Good managerial practice predicts a firm’s success better than R&D spending, IT spending or how skilled their workforce is. The study revealed that every 10 per cent improvement improvement in management quality was linked to a 14 per cent improvement in labour productivity.
The research also found that well managed firms were more profitable and less likely to go bust.
Put simply, when businesses are well managed they create more jobs, pay higher wages, and sell better (and cheaper) products.
Yet when it comes to management, the UK has fallen behind. A survey of over 11,000 businesses across 34 countries found that British firms are less likely to have adopted productivity-boosting management practices than their American, Japanese or German counterparts. Good news though, we’re marginally better than France. The study found that differences in management account for just under a third of differences in productivity within and between countries.
Management may seem a dry topic politically, but it’s essential to the case for popular capitalism. Competition, business-friendly regulation, and openness to trade all drive improvements and innovation in management.
Take the case for more competition and choice in public services; research from Propper, Bloom and Van Reenen found when patients had more choice within the NHS, hospitals were more likely to adopt best practices in management. This in turn lead to improvements in clinical outcomes. In other words, good management saves lives.
The same is true in education. A study that reviewed management practices in 1,500 schools across eight countries found better management was strongly linked to better student outcomes. Which school were managed best? They found that state schools with greater autonomy – think academies and charter schools – outperformed traditional state schools and private schools.